Note: the post script is an important part of this story. My original blog post was too hasty in making an assumption about third-party module sales.
The Trina Solar press release updating guidance has me utterly perplexed (and I follow this stock closely).
Here is the key text:
The Company estimates its solar module shipments in the third quarter of 2011 to be in the range of 372 MW to 375 MW, compared to the Company's previous guidance of 480 MW to 520 MW for the reasons discussed below. Additionally, for the third quarter of 2011, the Company estimates:
* Gross margin relating to its in-house wafer production and module production to be in the range of 18% to 19%, in line with the Company's previous guidance of high teens in percentage terms; and
* Overall gross margin to be in the range of 10% to 11%, which includes a non-cash inventory write down of approximately $19 million, compared to the Company's previous guidance of mid to high teens in percentage terms.This had me reaching for my calculator. Shipments of 372-375 MW - lets call it 374 MW as a reasonable average. Gross margin of 18% to 19% from wafer production - so lets call it 18.5 percent and in-line with their guidance. Gross margin of 10% to 11% - lets call it 10.5% - after an inventory write down of approximately $19 million (which compares to the old high-teens margin).
So by simple subtraction we estimate that 8 percentage points of margin represents $19 million. This suggests that the total revenue is = $19 million /.08 = $237.5 million.
But that is the revenue from 374 MW - so revenue per watt = $237.5 million/ 374 million watts = $0.635 per watt.
The lowest solar panel price mentioned in any analyst report I have seen is $1.08 per watt.
Under 64 cents per watt is either a catastrophe inconsistent with any observable solar panel price or there is a significant charge the company is not disclosing.
Which is it?
John
Post script. Some people have observed the typical 3 percent difference between IN HOUSE wafer production and END GROSS MARGIN - the difference being third party panels they buy in and then distribute.
They then calculate 5.5 percent margin difference - implying ASP in the 90s. Plausible - but still a disaster.
I had discounted this. Reason: I did not think there would be many third-party product sales when they are storing their own stuff in warehouse and can't sell it and are cutting production. That was a guess only. Their own production cut is so severe that third-party sales through their channel just look unlikely.
But maybe there really are large third party sales remaining. There might be a few reasons - but I am open to suggestion. Here goes for some thoughts:
(a). They are contractually obliged to sell for third parties and they have contractual expenses larger than they are telling us, or
(b). They still sell for third parties because the third parties can deliver cheaper than their marginal manufacturing cost, or
(c). The third party stuff is higher quality, or
(d). The collapse in volume was so total that there were third party sales in the beginning of the quarter but not in the end - so third party sales were a realistic part of the story but will not be next quarter, or
(e). Something I can't think of.
I was thinking - falsely perhaps - with the disastrous delivery numbers - that the third party distribution would be cut to zero. I should have put that assumption in my note.
J
15 comments:
I don't think you can take the inventory write down from the Gross Margin *from wafer production* to arrive at the *overall* gross margin. The fact that they had previous guidance of 'high teens' for wafer production and 'mid to high teens' for overall margin implies there are cost additions/revenue deductions at between the production and company level.
Perhaps.
OT: Krugman reckons "If the downward trend continues... we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal."
http://www.nytimes.com/2011/11/07/opinion/krugman-here-comes-solar-energy.html?partner=rssnyt&emc=rss
Is that really? What do you think, John?
wouldn't the write down be reported net of tax? Not sure what their marginal rate is, but if it's something like 40%, then that would get you to something just over a $1/W ASP.
John at 4:02 - I don't think Krugman should extrapolate countrywide solar vs coal costs from a small unhealthy business like solar panel manufacturing. Isn't that like saying we should all be driving Pontiacs because they were being sold at 30% discounts when GM was going BK?
There are probably huge distortions in the price of solar power. I'd love to see proposals and quotes for truly large solar installations totaling 5-10% US annual usage (and who would guarantee it).
Rich
Did you even look at earlier earnings releases? In 2Q, there was a 340 bps difference between gross margin from wafer and module production and overall gross margin. I don't follow this company ,and it took about two minutes to deduce that they try to disclose gross margin from internal manufacturing vs. when they purchase the wafers from the outside?
Anyway, they $19M appears to represent about 5.5%, implying that total revenue was around $345. Still only $0.92/watt.
And yes, I agree this industry is a turkey without subsidies.
Because their overall gross margin on modules comes from 1) internally produced wafers, 2) externally purchased wafers, and 3) the inventory writedown. Gross margins on internally sourced wafers are higher than on the wafers they buy from other companies. Module prices are still close to $1.00, no one is selling $0.63 modules (at least not yet).
http://pvinsights.com/ There are sub $1/W prints, just typically not Tier 1 guys.
As for sustainability, in rural areas in India (i.e. without a grid), it costs say $0.53/kWh to truck in diesel to power generators. A 30MW solar plant would cost say $0.23/kWh. Solar works well in some places, not in others. It's by no means perfect, but when you start looking at negative externalities of traditional power sources (CO2 emissions, wars, etc.) gets a bit more interesting... I wouldn't be dancing solar's death quite yet.
I wouldn't be dancing solar's death quite yet.
I don't think the issue is whether solar industry is dead or not. It is more an issue of whether solar industry will be profitable or not. In my mind, it is a race between supply and demand expansion. It is very obviously that manufacturer are expaning like crazy in the last few years trying to catch the demand. And now demand are clipped becuase of reducing subsidy and reducing demand caused by near recession in Europe. I think solar industry will go the way of TV manufacturer and disk drive manufacutrer. Both industries went through a growth pahse when demand outstripped supply.. But once supply catch up with demand, it become a game of dog eat dog with minimum margin until the industry consolidate... And we are already at a point that the industry supply and demand crossed and we are heading into a consolidation phase. Unless and until the demand pick up substaintially or the supply curve change becuase of new technology, we are heading into a show down between different solar panel manufacturere... Good to be a short in solar space for now...
their GM on in-house wafer is higher than ext sourced wafers because they are starting with raw poly instead of 3rd party wafers. their ASPs will average ~1.20 for the qtr.
Joe-John - the retail price in Australia is below that. Your price is a non-starter.
John
On this page their prices look very competitive and ASPs $1.41.
http://www.wholesalesolar.com/
Am I looking at something that is not representative of even the retail market, let alone the wholesale market which their name implies?
http://www.bloomberg.com/news/2011-11-08/most-solar-manufacturers-may-disappear-by-2015-trina-ceo-says.html
Anyone see this? Apparently Trina recognizes some issues in the industry. I guess Italy (you know the country with a debt crisis) isn't going to save the company...
You could have made a fortune on Olympus. Any opinion?
John
this is completely unrelated to Trina, so apologies for posting this up here but couldn't find your mail address.
I was thinking about the Olympus scandal in japan. You being a keen accounting buff I was wondering if there was anyway to have seen this from combing through the financials.
There were always rumors this was out there but was there anyway to pick this up from the financials? Reason I ask is I was reflecting on one of your comments that Sinoforest was much easier to clock as a fraud back in the late 90s than now given the accounts.
Sino admittedly is a slightly different case as in it seems the entire company is smoke and mirrors whereas Olympus is a real company with blackholes in the accounts....
Trina Solar US retail pricing now at 1.3 dollar per watt
http://www.wholesalesolar.com/bulk-solar-panels-by-the-pallet.html
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